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Section 1: 10-K (10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________ 
FORM 10-K
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
Commission File Number: 001-35385
________________________
STERLING BANCORP
(Exact name of Registrant as Specified in its Charter)
Delaware
 
80-0091851
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification Number)
 
 
 
400 Rella Blvd., Montebello, New York
 
10901
(Address of Principal Executive Office)
 
(Zip Code)
(845) 369-8040
(Registrant’s Telephone Number including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange On Which Registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Depositary Shares, each representing a 1/40th interest in a share of 6.50% Non-Cumulative Perpetual Preferred Stock, Series A
 
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    YES  ý  NO  ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES  ¨     NO  ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days  YES  ý    NO  ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the Registrant was required to submit and post such files).   YES  ý     NO  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( §229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer             x    Accelerated filer             ¨
Non-accelerated filer             ¨    (Do not check if a smaller reporting company)
Smaller reporting company     ¨
Emerging growth company     ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES  ¨     NO  ý
The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock as of June 30, 2018, was $5,298,550,969.

As of February 26, 2019, there were 212,705,340 outstanding shares of the Registrant’s common stock.
___________________________________
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to be filed within 120 days after the end of the Registrant’s year ended December 31, 2018.
 



STERLING BANCORP
FORM 10-K TABLE OF CONTENTS
December 31, 2018
 
PART I
 
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
 
 
ITEM 15.
SIGNATURES
 


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PART I
ITEM 1.
Business

The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned “Forward-Looking Statements” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report and other cautionary statements set forth elsewhere in this report.

Sterling Bancorp
Sterling Bancorp (the “Company,” “we,” “our,” “ours,” or “us”) is a Delaware corporation, bank holding company and financial holding company founded in 1998 that owns all of the outstanding shares of common stock of its principal subsidiary, Sterling National Bank (the “Bank”). At December 31, 2018, we had, on a consolidated basis, $31.4 billion in assets, $21.2 billion in deposits, stockholders’ equity of $4.4 billion and 216,227,852 shares of common stock outstanding. Our financial condition and results of operations are discussed herein on a consolidated basis with the Bank.

As you review the following disclosures about our business you should be aware of the following recent significant transactions and events, which are discussed below:

Transfer of residential mortgage loans from portfolio loans to loans held for sale
At December 31, 2018, the Company transferred residential mortgage loans with an unpaid principal balance of $1.6 billion from portfolio loans to loans held for sale, which represent substantially all of the remaining 15-year and 30-year fixed rate residential mortgage loans acquired in the Astoria Merger. These loans were subject to purchase accounting discounts and were transferred to loans held for sale at the lower of cost or market which approximates their carrying value. We anticipate these loans will be sold in the first quarter of 2019.

Repurchase of common stock
As more fully described in Note 17 “Stockholders’ Equity”, in December 2018, the Board of Directors approved an increase in the amount of shares authorized to be repurchased under the existing stock repurchase program to 20,000,000 shares of common stock. In the fourth quarter of 2018, the Company repurchased 9,114,771 shares of common stock in the open market at a weighted average price of $17.54 per share, for total consideration of $159.9 million. The Company anticipates completing the common stock repurchase program in the first half of 2019, including repurchasing approximately 5.0 million shares in the first quarter of 2019, depending on market conditions.

Acquisition of Advantage Funding Management Co., Inc. (“Advantage Funding”)
On April 2, 2018, the Bank acquired 100% of the outstanding common stock of Advantage Funding (the “Advantage Funding Acquisition”). The total consideration was $502.1 million and was paid in cash on the closing date. Advantage Funding was a provider of commercial vehicle and transportation financing services based in Lake Success, New York. Advantage Funding had total outstanding loans and leases of $457.6 million on the acquisition date consisting mainly of fixed rate loans. The Bank paid a premium on the gross loans and leases receivable of 4.5% or $20.3 million. In the second quarter of 2018, we recorded a $4.4 million restructuring charge consisting mainly of professional fees, retention and severance compensation, systems integration expense and facilities consolidation. This charge is included in charge for asset write-downs, systems integration, severance and retention on the consolidated income statements. The Advantage Funding Acquisition is consistent with our strategy of growing commercial loans and increasing the proportion of commercial loans in our loan portfolio. The Advantage Funding operations were fully integrated into our equipment finance business operations in 2018.

Acquisition of Astoria Financial Corporation
On October 2, 2017, we completed the acquisition of Astoria Financial Corporation (“Astoria”), which we refer to as the “Astoria Merger.” The Astoria Merger was a stock-for-stock transaction valued at $2.2 billion based on the closing price of our common stock on September 29, 2017, which was $24.65 per share. Under the terms of the Astoria Merger, Astoria shareholders received 0.875 of a share of our common stock for each share of Astoria common stock. The Astoria Merger has furthered our strategy of growing in the greater New York metropolitan region by providing us with a significant presence and deposit market share in Long Island, New York. Additionally, the integration of Astoria’s business and operations has allowed us to realize significant operating expense savings. See additional disclosure regarding the Astoria Merger in Note 2. “Acquisitions” in the notes to consolidated financial statements.

Preferred Stock Issuance
On October 2, 2017, in connection with the Astoria Merger, we registered and issued 5,400,000 depositary shares (the “Depositary Shares”), which represented an aggregate issuance of $135.0 million in preferred equity. Each Depositary Share represents a

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1/40th interest in our 6.50% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Company Preferred Stock”). Each share of Astoria’s 6.50% Non-Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share, with a liquidation preference of $1,000 per share, issued and outstanding immediately prior to the effective time of the Astoria Merger was converted into the right to receive one share of our Company Preferred Stock. Dividends are payable January 15, April 15, July 15 and October 15 of each year and began October 15, 2017. Holders of the Depositary Shares will be entitled to all proportional rights and preferences of the Company Preferred Stock (including dividend, voting, redemption and liquidation rights). The Company Preferred Stock is redeemable in whole or in part from time to time, on October 15, 2022 or any dividend payment date thereafter. Under the terms of the Company Preferred Stock, our ability to pay dividends on, make distributions with respect to or repurchase, redeem or otherwise acquire shares of our common stock or any preferred stock ranking on parity with or junior to the Company Preferred Stock will be subject to restrictions in the event that we do not declare and either pay or set aside a sum sufficient for payment of dividends on the Company Preferred Stock for the immediately preceding dividend period. 

November 2016 Common Equity Capital Raise
On November 22, 2016, we issued 4,370,000 shares of our common stock in a public offering at $20.95 per share. We received proceeds net of underwriting discounts, commissions and expenses of $91.0 million. The net proceeds were used for general corporate purposes and to support growth in interest earning assets, including loan originations and purchases of investment securities.

Acquisition of Restaurant Franchise Financing Loan Portfolio
On September 9, 2016, the Bank acquired a restaurant franchise financing loan portfolio from GE Capital with an unpaid principal balance of approximately $169.8 million. Total cash paid for the portfolio was $163.3 million, which included a discount to the balance of gross loans receivable of 4.00%, or $6.8 million, plus accrued interest receivable. As the acquired assets did not constitute a business, the transaction was accounted for as an asset purchase.

Acquisition of NewStar Business Credit LLC
On March 31, 2016, we acquired 100% of the outstanding equity interests of NewStar Business Credit LLC (“NSBC”), which we refer to as the “NSBC Acquisition.” NSBC’s loans had a fair value of $320.4 million on the acquisition date. We paid a premium on the balance of gross loans receivable acquired of 5.90%, or $18.9 million. The NSBC Acquisition was an all cash transaction with a value of $346.7 million; the transaction doubled the size of our asset-based lending portfolio and expanded the geographic footprint of our asset-based lending business. See Note 2. “Acquisitions” in the notes to consolidated financial statements for additional information.

Sterling National Bank
The Bank is a full-service regional bank founded in 1888. Headquartered in Montebello, New York, the Bank specializes in the delivery of services and solutions to business owners, their families and consumers within the communities we serve through teams of dedicated and experienced relationship managers. The Bank offers a complete line of commercial, business, and consumer banking products and services. As of December 31, 2018, the Bank had $31.4 billion in assets, $21.2 billion in deposits and 1,907 full-time equivalent employees (“FTEs”).

Subsidiaries
We conduct substantially all of our operations through the Bank. The Bank has a number of wholly-owned subsidiaries, including a company that originates loans to municipalities and governmental entities and acquires securities issued by state and local governments, a real estate investment trust that holds real estate mortgage loans, several subsidiaries that hold foreclosed properties acquired by the Bank, and other subsidiaries that have an immaterial impact on our financial condition or results of operations.

Available Information
We file reports with the Securities and Exchange Commission (the “SEC”). Our website (www.sterlingbancorp.com) contains a direct link to our filings with the SEC, without charge, including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these filings, registration statements on Form S-3 and Form S-4, as well as ownership reports on Forms 3, 4 and 5 filed by our directors and executive officers. Copies may also be obtained, without charge, by written request to Sterling Bancorp, 400 Rella Boulevard, Montebello, New York 10901, Attention: Investor Relations. The SEC also maintains an Internet site that contains reports, proxy, and information statements and other information regarding issuers at http://www.sec.gov. Our website is not part of this annual report on Form 10-K.


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Strategy
The Bank operates as a regional bank providing a broad offering of deposit, lending and wealth management products to commercial, consumer and municipal clients in our market area. We focus mainly on delivering products and services to small and middle market commercial businesses and affluent consumers.  We believe that this is a client segment that is underserved by larger bank competitors in our market area.

Our primary strategic objective is to drive positive operating leverage which will allow us to generate sustainable growth in revenues and earnings over time. We define operating leverage as the ratio of growth in adjusted total revenue divided by growth in adjusted total operating expenses. To achieve this goal, we focus on the following initiatives:

Target specific “high value” client segments and geographic markets in which we have competitive advantages.
Deploy a single point of contact, relationship-based distribution strategy through our commercial banking teams and financial centers.
Continuously expand and refine our delivery and distribution channels by rationalizing our investments in businesses that do not meet our risk-adjusted return targets and re-allocating our capital and resources to hiring commercial banking teams and growing businesses that are in-line with our commercial banking strategy.
Maximize efficiency through a technology enabled, low-cost operating platform and by controlling operating costs.
Create a high productivity culture through differentiated compensation programs based on a pay-for-performance philosophy.
Maintain strong risk management systems and proactively manage enterprise risk.

The Bank targets the following geographic markets: (i) the New York Metro Market, which includes Manhattan and Long Island; and (ii) the New York Suburban Market, which includes Rockland, Orange, Sullivan, Ulster, Putnam and Westchester Counties in New York and Bergen County in New Jersey. The Bank also originates loans and deposits in select markets nationally through our asset-based lending, payroll finance, warehouse lending, factored receivables, equipment finance and public sector finance businesses. We believe the Bank operates in an attractive footprint that presents us with significant opportunities to execute our strategy of targeting small and middle market commercial clients and affluent consumers.

We focus on building client relationships that allow us to gather low cost, core deposits and originate high quality loans. We maintain a disciplined pricing strategy on deposits that allows us to compete for loans while maintaining an appropriate spread over funding costs. We offer diverse loan products to commercial businesses, real estate owners, real estate developers and consumers. We have continued to emphasize growth in our commercial loan balances and, as a result, we believe that we have a high quality, diversified loan portfolio with a favorable mix of loan types, maturities and yields. 

We deploy a team-based distribution strategy in which clients are served by a focused and experienced group of relationship managers who are responsible for all aspects of the client relationship and delivery of our products and services. Since 2012, we have consolidated a significant amount of financial centers and other consumer businesses that did not fit our strategy or meet our risk-adjusted return hurdles, such as our residential mortgage originations business, trust division and title insurance business. We expect that we will continue to reduce our total number of financial centers in 2019, and will reallocate a portion of the operating expense savings from these consolidations into new commercial banking teams, growing our commercial finance businesses and selectively investing in commercial and retail banking technologies. As of December 31, 2018, we had 35 commercial banking teams; we anticipate adding three to five teams in 2019. We anticipate we will generate substantial growth in loans and deposits through our existing teams and new teams.
 
We are continuing to reposition our balance sheet to increase the proportion of commercial loans to total portfolio loans. To that end, we reclassified $1.6 billion of residential mortgage loans from portfolio loans to loans held for sale and anticipate selling these loans in the fist quarter of 2019. Additionally, in January 2019, we announced that we had entered into a definitive agreement to acquire approximately $500 million in asset-based and equipment finance loans from Woodforest National Bank. We believe these actions will be accretive to our net interest margin and earnings over time.

We augment organic growth with opportunistic acquisitions of banks and other financial services businesses. For the periods presented, we completed the following acquisitions: the NSBC Acquisition on March 31, 2016; the restaurant franchise financing loan portfolio from GE Capital on September 9, 2016; the Astoria Merger on October 2, 2017; and the acquisition of Advantage Funding on April 2, 2018. These acquisitions have supported our expansion into attractive markets and have diversified our business lines. See additional disclosure of our acquisitions in Note 2. “Acquisitions” in the notes to consolidated financial statements.


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Competition
The greater New York metropolitan region is a highly competitive market area with a concentration of financial institutions, many of which are significantly larger institutions with greater financial resources than us, and many of which are our competitors to varying degrees. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, insurance companies and other financial services companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from non-depository competitors such as mutual funds, securities and brokerage firms and insurance companies. We have emphasized relationship banking and the advantage of local decision-making in our banking business. We do not rely on any individual, group, or entity for a material portion of our deposits. Net interest income could be adversely affected should competitive pressures cause us to increase the interest rates paid on deposits in order to maintain our market share.

Employees
As of December 31, 2018, we had 1,907 full-time equivalent employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.

Supervision and Regulation
General
We and the Bank are subject to extensive regulation under federal and state laws, significant elements of which are described below. This description is qualified in its entirety by reference to the full text of the statutes, regulations and policies referenced. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or various policies applicable to us and our subsidiaries could have a material effect on our business, financial condition and results of operations.

Regulatory Agencies
We are a legal entity separate and distinct from the Bank and its other subsidiaries. As a bank and a financial holding company, we are regulated under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and our subsidiaries are subject to inspection, examination and supervision by the Federal Reserve Board (the “FRB”) as our primary federal regulator.

As a national bank, the Bank is principally subject to the supervision, examination and reporting requirements of the Office of the Comptroller of the Currency (the “OCC”), as its primary federal regulator, as well as the Federal Deposit Insurance Corporation (the “FDIC”). Further, because the Bank’s total assets exceed $10 billion, it is also subject to Consumer Financial Protection Bureau (the “CFPB”) supervision. Insured banks, including the Bank, are subject to extensive regulations that relate to, among other things: (i) the nature and amount of loans that may be made by the Bank and the rates of interest that may be charged; (ii) types and amounts of other investments; (iii) branching; (iv) permissible activities; (v) reserve requirements; and (vi) dealings with officers, directors and affiliates.

Bank Holding Company Activities
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be closely related thereto. In addition, bank holding companies that qualify and elect to be financial holding companies such as us may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB), without prior approval of the FRB.

To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized” and “well managed.” A depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the section captioned “Prompt Corrective Action.” A depository institution subsidiary is considered “well managed” if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. A financial holding company’s status also depends upon it maintaining its status as “well capitalized” and “well managed” under applicable FRB regulations. If a financial holding company ceases to meet these capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval

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of the FRB. If the company does not return to compliance within 180 days, the FRB may require divestiture of the holding company’s depository institutions.

The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.

The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of banks and banking companies. The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition by us of more than 5% of the voting shares or substantially all of the assets of a bank or bank holding company. Under the Bank Merger Act, the prior approval of the FRB or other appropriate bank regulatory authority is required for the Bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act of 1977 (the “CRA”) and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.

Capital Requirements
We are required to comply with applicable capital adequacy standards established by the FRB, and the Bank is required to comply with applicable capital adequacy standards established by the OCC. The current risk-based capital standards applicable to us and the Bank are based on the December 2010 capital standards, known as Basel III, of the Basel Committee on Banking Supervision.

Under the Basel III Capital Rules, the minimum capital ratios are:

4.5% Common Equity Tier 1 (“CET1”) to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total Capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

In addition, the Basel III Capital Rules have a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The implementation of the capital conservation buffer was phased in over time until reaching 2.5% on January 1, 2019. The fully phased-in Basel III Capital Rules require us and the Bank to maintain minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%; and a minimum leverage ratio of 4%. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (7%) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

In addition, under the general risk-based capital rules, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, we and the Bank were able to make a one-time permanent election to continue to exclude these items and did so. Under the Basel III Capital Rules, trust preferred securities no longer included in our Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without phase-out.

The Basel III Capital Rules prescribe a standardized approach for risk weighting that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

With respect to the Bank, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as amended (the “FDIA”) as discussed in the section captioned “Prompt Corrective Action.”

Management believes that we and the Bank met all capital adequacy requirements under the Basel III Capital Rules as of December 31, 2018 and would have met all such requirements on a fully phased-in basis as if such requirements had been in effect.


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Prompt Corrective Action
The FDIA requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures reflecting the Basel III Capital Rules are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio, the leverage ratio and the ratio of tangible equity to average quarterly tangible assets.

A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 risk-based capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a Tier 1 leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 risk-based capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a Tier 1 leverage ratio of 4.0% or greater and is not “well capitalized;” (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 risk-based capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a Tier 1 leverage ratio of less than 4.0% and is not “significantly undercapitalized” or “critically undercapitalized”; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 risk-based capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a Tier 1 leverage ratio of less than 3.0% and is not “critically undercapitalized”; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The aggregate liability of the parent holding company in such a situation is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

We believe that as of December 31, 2018, the Bank was “well capitalized” based on the aforementioned ratios. For further information regarding the capital ratios and leverage ratio of us and the Bank, please see the discussion in the section captioned “Liquidity and Capital Resources” included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 17. “Stockholders’ Equity - Regulatory Capital Requirements” in the notes to consolidated financial statements all of which are included elsewhere in this report.

Dividend Restrictions
We depend on funds maintained or generated by our subsidiaries, principally the Bank, for our cash requirements. Various legal restrictions limit the extent to which the Bank can pay dividends or make other distributions to us. All national banks are limited in the payment of dividends without the approval of the OCC to an amount not to exceed the net profits (as defined by OCC regulations) for that year-to-date combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses. Under the foregoing restrictions, and while maintaining its “well capitalized” status, as of December 31, 2018, the Bank could pay dividends of approximately $276.0 million to us without obtaining regulatory approval. This is not necessarily indicative of amounts that may be paid or are available to be paid in future periods.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), a depository institution, such as the Bank, may not pay dividends if payment would cause it to become undercapitalized or if it is already undercapitalized. The payment of dividends by us and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital.

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The appropriate federal regulatory authorities have indicated that paying dividends that deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

Source of Strength Doctrine
FRB policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, we are expected to commit resources to support the Bank, including at times when we may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks.

Deposit Insurance
Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC, and the Bank is subject to deposit insurance assessments to maintain the DIF. The deposit insurance provided by the FDIC per account owner is $250,000 for all types of accounts.

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, DIF-insured institutions. It also may prohibit any DIF-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against insured institutions. Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based upon supervisory evaluations, regulatory capital level, and certain other factors, with less risky institutions paying lower assessments. The range of current assessment rates is now 1.5 to 40 basis points. As the DIF reserve ratio grows, the rate schedule will be adjusted downward. The FDIC has the authority to raise or lower assessment rates, subject to limits, and to impose special additional assessments. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. On November 28, 2018, the FDIC announced that at September 30, 2018 the DIF ratio reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35% ahead of the September 30, 2020 deadline required under the Dodd-Frank Act. Accordingly the surcharge applicable to institutions with assets of $10 billion or more, which includes the Bank, will cease.

FDIC deposit insurance expense totaled $16.7 million for the year ended December 31, 2018, $9.0 million for the year ended December 31, 2017, and $6.4 million for the year ended December 31, 2016. FDIC deposit insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding bonds issued by FICO in the late 1980s to recapitalize the now defunct Federal Savings & Loan Insurance Corporation. The FICO assessments will continue until the bonds mature in September 2019.

Safety and Soundness Regulations
In accordance with the FDIA, the federal banking agencies adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, regulations adopted by the federal banking agencies authorize the agencies to require that an institution that has been given notice that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, the institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the agency must issue an order directing corrective actions and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA. If the institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and impose civil monetary penalties.

Incentive Compensation
The Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as us and the Bank, having at least $1 billion in total assets, that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators were required to

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establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed an initial version of such regulations in April 2011 and a revised version in May 2016, which largely retained the provisions from the April 2011 version, but the regulations have not been finalized and are still under review by the agencies. If the regulations are adopted in the revised form proposed in May 2016, they will impose limitations on the manner in which we may structure compensation for our executives.

In June 2010, the FRB, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act, discussed above.

The FRB will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as ours, that are not “large, complex banking organizations”. These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Loans to One Borrower
The Bank generally may not make loans or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2018, the Bank was in compliance with the loans-to-one-borrower limitations.

Community Reinvestment Act
The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings that must be publicly disclosed. In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of certain applications. The Bank received a rating of “satisfactory” in its most recent CRA exam.

Financial Privacy
The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

The Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe the federal banking agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities.

Anti-Money Laundering and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations on financial institutions, creating new crimes and penalties, and expanding the extra-territorial jurisdiction of the United States. Failure of a

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financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Stress Testing
The Dodd-Frank Act originally mandated company-run stress tests for FDIC-insured state non-member banks and bank holding companies with between $10 billion and $50 billion in assets. We and the Bank became subject to stress testing beginning January 1, 2017. Such tests assess the potential impact of different scenarios on the consolidated earnings and capital of that bank and its holding company and certain related items over a nine-quarter forward-looking planning horizon, taking into account all relevant exposures and activities. The Company and the Bank were additionally required to report the results of such stress tests to the FRB and FDIC, and the Company and the Bank released their Annual Company-Run Dodd-Frank Act Stress Test (“DFAST”) disclosure results on October 17, 2017. Effective May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act, immediately upon enactment, exempted bank holding companies with under $100 billion in assets from these requirements to perform stress tests. Therefore, the Company and the Bank are no longer required to perform such stress testing.

Volcker Rule
The Dodd-Frank Act amended the BHC Act to require the federal bank regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds), commonly referred to as the “Volcker Rule”. The Volcker Rule also requires covered banking entities, including us and the Bank, to implement certain compliance programs, and the complexity and rigor of such programs is determined based on the asset size and complexity of the business of the covered company. We are subject to heightened compliance requirements as a covered banking entity with over $10 billion in assets.

Durbin Amendment
The Dodd-Frank Act included provisions which restrict interchange fees to those which are “reasonable and proportionate” for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing. This statutory provision is known as the “Durbin Amendment.” The Federal Reserve issued final rules implementing the Durbin Amendment on June 29, 2011. In the final rules, interchange fees for debit card transactions were capped at $0.21 plus five basis points in order to be eligible for a safe harbor such that the fee is conclusively determined to be reasonable and proportionate. The interchange fee restrictions contained in the Durbin Amendment, and the rules promulgated thereunder, only apply to debit card issuers with $10 billion or more in total consolidated assets, which includes the Bank.

Transactions with Affiliates
Transactions between the Bank and its affiliates are regulated by the FRB under sections 23A and 23B of the Federal Reserve Act and related FRB regulations. These regulations limit the types and amounts of covered transactions engaged in by the Bank and generally require those transactions to be on an arm’s-length basis. The term “affiliate” is defined to mean any company that controls or is under common control with the Bank and includes us and our non-bank subsidiaries. “Covered transactions” include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the FRB) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In general, these regulations require that any such transaction by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis.

Federal law also limits the Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.

Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York (“FHLB”), the Bank is required to acquire and hold shares of capital stock of the FHLB in an amount at least equal to the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the

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activity-based stock purchase requirement, determined on a daily basis. As of December 31, 2018, the Bank was in compliance with the minimum stock ownership requirement.

Federal Reserve System
FRB regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily interest bearing demand deposit accounts and non-interest bearing demand deposit accounts). In 2018, a reserve of 3% was to be maintained against aggregate transaction accounts between $16.0 million and $122.3 million (subject to adjustment by the FRB) up from between $15.5 million and $115.1 million in 2017, plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of $122.3 million. The first $16.0 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. The FRB reviews the cash reserve requirement annually, and the FRB has announced a reserve of 3% will have to be maintained against aggregate transactions accounts between $16.3 million and $124.2 million in 2019. The Bank is in compliance with the foregoing requirements.

Consumer Protection Regulations
The Bank is subject to federal consumer protection statutes and regulations promulgated under those laws, including, but not limited to, the following:

The Truth-In-Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers;
The Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide certain information about home mortgage and refinanced loans;
The Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit;
The Fair Credit Reporting Act and Regulation V, governing the provision of consumer information to credit reporting agencies and the use of consumer information; and
The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies.

Deposit operations are also subject to:

The Truth in Savings Act and Regulation DD, which requires disclosure of deposit terms to consumers;
Regulation CC, which relates to the availability of deposit funds to consumers;
The Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
The Electronic Funds Transfer Act and Regulation E, governing automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
In addition, the Bank may be subject to certain state laws and regulations designed to protect consumers.

Consumer Financial Protection Bureau
Created under the Dodd-Frank Act, and given extensive implementation and enforcement powers over all banks with over $10 billion in assets, including the Bank, the CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks including, among other things, the authority to prohibit “unfair, deceptive, or abusive” acts and practices. The CFPB has the authority to investigate possible violations of federal consumer financial law, hold hearings and commence civil litigation. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or an injunction.

ITEM 1A. Risk Factors

We are subject to extensive regulatory oversight.
We and our subsidiaries are subject to extensive supervision and regulation. We are supervised and regulated by the Federal Reserve System (the “Federal Reserve”) and the Bank is supervised and regulated by the OCC, as its primary federal regulator, by the FDIC, as the insurer of its deposits, and by the CFPB, which has broad authority to regulate financial service providers and financial products. The application and administration of laws, rules and regulations may vary by such regulators. In addition, we are subject to consolidated capital requirements and must serve as a source of strength to the Bank.

As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities and obtain financing. This regulatory structure is designed primarily for the protection of the DIF and our depositors, as well as other consumers, and not to benefit our shareholders. This regulatory structure also gives the regulatory authorities extensive discretion in connection

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with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes, all of which can have a material adverse effect on our financial condition, results of operations and our ability to pay dividends or repurchase shares. Our regulators have also intensified their focus on bank lending criteria and controls, and on the USA Patriot Act’s anti-money laundering and the Bank Secrecy Act compliance requirements, and there is increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with laws, rules, regulations, guidelines and examination procedures in the anti-money laundering area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures and systems we have in place to ensure compliance are without error, and there is no assurance that in every instance we are in full compliance with these requirements. In addition, emerging technologies, such as cryptocurrencies, could limit our ability to maintain compliance with applicable requirements to track the movement of funds.

Our failure to comply with applicable laws, rules and regulations could result in a range of sanctions, legal proceedings and enforcement actions, including the imposition of civil monetary penalties, formal agreements and cease and desist orders. In addition, the OCC and the FDIC have specific authority to take “prompt corrective action,” depending on our capital levels. For example, currently, we are considered “well-capitalized” for prompt corrective action purposes. If we were to be designated by the OCC as “adequately capitalized,” we would become subject to additional restrictions and limitations, such as limits on the Bank’s ability to take brokered deposits. If we were to be designated by the OCC in one of the lower capital levels (such as “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized”), we would be required to raise additional capital and be subject to progressively more severe restrictions on our operations, and management, including the possible replacement of senior executive officers and directors, capital distributions, and, if we became “critically undercapitalized,” to the appointment of a conservator or receiver.

Changes in laws, government rules and regulations and monetary policy may have a material effect on our results of operations.
Financial institutions are subject to significant laws, rules and regulations and may be subject to further additional legislation, rulemaking or regulation in the future, none of which is within our control. Significant new laws, rules or regulations or changes in, or repeals of, existing laws, rules or regulations, including, but not limited to, those with respect to federal and state taxation and the Dodd-Frank Act, may cause our results of operations to differ materially. In addition, the costs and burden of compliance with such laws, rules and regulations continue to increase and could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for the Bank, as well as for our borrowers, particularly as implemented through the Federal Reserve, primarily through open market operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions could have a material impact on the Bank or our borrowers, and, as a result, our results of operations.

Legislative and regulatory initiatives to support the financial services industry have been coupled with numerous restrictions and requirements that could detrimentally affect our business.
We are subject to extensive regulation, supervision, and legal requirements that govern almost all aspects of our operations, see Item 1 "Business-Supervision and Regulation." One example of this type of federal regulation is the Dodd-Frank Act and the rules and regulations promulgated thereunder which have had, and will continue to have, significant impact on the United States bank regulatory structure and the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.

The Dodd-Frank Act significantly impacted various consumer protection laws, rules and regulations applicable to financial institutions including subjecting the Bank to: (1) the CFPB, which supervises financial institutions such as the Bank that have assets in excess of $10 billion, and (2) state consumer protection laws in each state where we do business. CFPB supervision includes compliance with the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Savings Act, among others. The Dodd-Frank Act and its implementing regulations, and other similar laws and regulations, also impose various additional requirements on bank holding companies with $10 billion or more in total assets, including prescribing minimum capital requirements, requiring annual stress testing and limiting the business activities the Bank may engage in (e.g., the Volker Rule) and dividends or distribution the Bank can pay to the Company, among others.

Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs, including hiring additional compliance or other personnel and designing and implementing additional internal controls. Further, we may incur compliance-related costs and our regulators may also consider our level of compliance with these regulatory requirements when examining our operations generally or considering any request for regulatory approval we may make, even requests for approvals on unrelated matters. Further, changes in laws, regulations or regulatory policies could adversely affect the operating environment for the Company in substantial and unpredictable ways, increase our cost of doing business, impose new

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restrictions on the way in which we conduct our operations or add significant operational constraints that might impair our profitability. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on our business, financial condition or results of operations.

Basel III capital rules generally require insured depository institutions and their holding companies to hold more capital, which could limit our ability to pay dividends, engage in share repurchases and pay discretionary bonuses.
The Federal Reserve, the FDIC and the OCC adopted final rules for the Basel III capital framework that substantially amended the regulatory risk-based capital rules applicable to us. The rules phased in over time, and became fully effective on January 1, 2019. The rules apply to us, as well as to the Bank, and require us to have a CET1 to risk-weighted assets ratio of 7%, a Tier 1 to risk-weighted assets ratio of 8.5%, and a total capital to risk-weighted assets ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on our ability to pay dividends, engage in share repurchases and pay discretionary bonuses. These rules also establish a maximum percentage of eligible retained income that can be utilized for such actions.

Our outstanding debt obligations and preferred stock, and our level of indebtedness could adversely affect our ability to raise additional capital and to meet our obligations under our existing indebtedness.
We have approximately $5.4 billion in outstanding indebtedness and obligations related to outstanding preferred stock. Our existing debt, together with any future incurrence of additional indebtedness, and outstanding preferred stock, could have important consequences for our creditors and stockholders. For example, it could:

limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes;
restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
restrict us from paying dividends to our stockholders; and
increase our vulnerability to general economic and industry conditions.

An inadequate allowance for loan losses would negatively impact our results of operations.
We are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to avoid losses. Credit losses are inherent in the lending business and could have a material adverse effect on our results of operations. Volatility and deterioration in the broader economy may also increase our risk of credit losses. The determination of an appropriate level of allowance for loan losses is an inherently uncertain process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control, and charge-offs may exceed current estimates. We evaluate the collectability of our loan portfolio and provide an allowance for loan losses that we believe is adequate based upon various factors, including, but not limited to: the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have loss potential; delinquency trends; the estimated fair market value of the collateral; current economic conditions; the views of our regulators; and geographic and industry loan concentrations. If any of our evaluations are incorrect and/or borrower defaults result in losses exceeding our allowance for loan losses, our results of operations could be significantly and adversely affected. We cannot assure you that our allowance for loan losses will be adequate to cover probable loan losses inherent in our portfolio.

The need to account for assets at market prices may adversely affect our results of operations.
We report certain assets, including investments and securities, at fair value. Generally, for assets that are reported at fair value, we use quoted market prices, when available, or valuation models that utilize market data inputs to estimate fair value. Because we carry these assets on our books at their fair value, we may incur losses even if the assets in question present minimal credit risk. In addition, we may be required to recognize other-than-temporary impairments in future periods with respect to securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period.

Changes in the value of goodwill and intangible assets could reduce our earnings.
We account for goodwill and other intangible assets in accordance with U.S. generally accepted accounting principles (“GAAP”), which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level, which requires us to recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters

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or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions, such as us, and could result in an impairment charge at a future date.

Commercial real estate, commercial & industrial and ADC (as defined below) loans expose us to increased risk and earnings volatility.
We consider our commercial real estate loans, commercial & industrial loans and acquisition, development & construction (“ADC”) loans to be higher risk categories in our loan portfolio. These loans are particularly sensitive to economic conditions. At December 31, 2018, our portfolio of commercial real estate loans, including multi-family loans, totaled $9.4 billion, or 48.9% of portfolio loans, our commercial & industrial loans (including traditional commercial & industrial, asset-based lending, payroll finance, warehouse lending, factored receivables, equipment finance and public sector finance) totaled $6.5 billion, or 34.0% of portfolio loans, and our ADC loans totaled $267.8 million, or 1.39% of portfolio loans. We plan to continue to emphasize the origination of these types of loans, other than ADC loans, where we have ceased originations of land acquisition and development loans. We continue to make construction loans on an exception basis.

Commercial real estate loans generally involve a higher degree of credit risk than residential loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on loans secured by commercial real estate often depend on the successful operation and management of the businesses that hold the loans, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation. In the case of commercial & industrial loans, although we strive to maintain high credit standards and limit exposure to any one borrower, the collateral for these loans often consists of accounts receivable, inventory and equipment. This type of collateral typically does not yield substantial recovery in the event we need to foreclose on it and may rapidly deteriorate, disappear, or be misdirected in advance of foreclosure. This adds to the potential that our charge-offs will be more volatile than we have experienced in the past, which could significantly negatively affect our earnings in any quarter. In addition, some of our ADC loans pose higher risk levels than the levels expected at origination, as projects may stall or sell at prices lower than expected. In addition, many of our borrowers also have more than one commercial real estate or ADC loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to significantly greater risk of loss.

Loans in our residential mortgage loan portfolio include interest only loans and loans that have recently converted to principal amortization status.
At December 31, 2018, included in our residential mortgage loan portfolio were $292.3 million of interest only loans and other residential mortgage loans that converted to principal amortization status within the past 24 months. After conversion to principal amortization status, a borrower’s monthly payment may increase substantially and the borrower may not be able to afford the increased debt service, which could result in increased delinquencies and, accordingly, potentially adversely affect our operating results. At December 31, 2018, there were $12.4 million of loans that are interest only or were interest only within the past 24 months that were in non-accrual status.

Our continuing concentration of loans in our primary market area may increase our risk.
Our success depends primarily on the general economic conditions in the counties in which we conduct most of our business. The economic conditions in these counties may be different from, and in some instances worse than, the economic conditions in the United States as a whole. Most of our loans and deposits are generated from customers primarily in the New York Metro Market, which includes Manhattan, the boroughs and Long Island, and certain portions of the New York Suburban Market including Rockland, Westchester and Orange Counties in New York. We also have a presence in Ulster, Sullivan and Putnam Counties in New York and in Bergen County, New Jersey, as well as other counties in northern New Jersey. Our expansion into New York City and continued growth in Westchester County and Bergen County has helped us diversify our geographic concentration with respect to our lending activities but deterioration in economic conditions in our market area would still adversely affect our results of operations and financial condition.

Environmental liability associated with our lending activities could result in losses.
In the course of business, we may acquire, through foreclosure, properties securing loans that are in default. Particularly in commercial real estate lending, there is a risk that material environmental violations could be discovered on these properties. In this event, we might be required to remedy these violations at the affected properties at our sole cost and expense. The cost of remedial action could substantially exceed the value of affected properties, we may not have adequate remedies against the prior owner or other responsible parties and we could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our financial condition and results of operations.
    

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Changes in market interest rates could adversely affect our financial condition and results of operations.
Our financial condition and results of operations are significantly affected by changes in market interest rates. Our results of operations substantially depend on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. In general, our balance sheet is more asset sensitive because our assets mature or re-price at a faster pace than our liabilities. If interest rates continue at existing levels or decline, net interest income would be adversely affected as asset yields would be expected to decline at faster rates than deposit or borrowing costs. A decline in net interest income may also occur if competitive market pressures limit our ability to maintain or lag deposit costs. Wholesale funding costs may also increase at a faster pace than asset re-pricing.

We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and securities. Decreases in interest rates often result in increased prepayments of loans and securities, as borrowers refinance their loans to reduce borrowings costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans.

Changes in interest rates also affect the value of our interest earning assets and, in particular, our securities portfolio. The Federal Reserve raised the federal funds rate four times in fiscal year 2018. Generally, the value of our securities fluctuates inversely with changes in interest rates. As of December 31, 2018, our available for sale securities portfolio totaled $3.9 billion. Decreases in the fair value of securities available for sale could have an adverse effect on stockholders’ equity and comprehensive income.

Our ability to pay dividends is subject to regulatory limitations and other limitations, which may affect our ability to pay dividends to our stockholders or to repurchase our common stock.
We are a separate legal entity from our subsidiary, the Bank, and we do not have significant operations of our own. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the Bank’s regulators could assert that payment of dividends or other payments may result in an unsafe or unsound practice. In addition, we are subjected to consolidated capital requirements and must serve as a source of strength to the Bank. If the Bank is unable to pay dividends to us or we are required to retain capital or contribute capital to the Bank, we may not be able to pay dividends on our common stock or to repurchase shares of common stock.

We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our operations and financial condition.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that all of our customers, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused, we could be exposed to litigation or regulatory sanctions under personal information laws and regulations. Concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our operations and financial condition.

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A breach, failure or interruption of information security, including as a result of cyber-attacks or other cyber incidents, could negatively affect our earnings or otherwise harm our business.
Increasingly, we depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the Internet from both internal sources and external, third-party vendors. We devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, but we may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by external or internal security breaches, acts of vandalism, viruses, misplaced or lost data, programming or human errors or other similar events, all of which could have an adverse effect on our results of operations.

Information security risks for financial institutions like us continue to increase in part because of new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers continue to engage in attacks against large financial institutions including denial of service attacks designed to disrupt external customer facing services, and ransomware attacks designed to deny organizations access to key internal resources or systems. While to date we have not been subject to material cyber-attacks or other cyber incidents, we cannot guarantee all our systems, or the systems of the third-party vendors we rely on, are free from vulnerability to attack, despite safeguards we and our third-party vendors have instituted.

Moreover, we are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection. Additionally, we face risks related to cyber-attacks and other security breaches in connection with our own and third-party systems, processes and data, including credit card transactions that typically require the transmission of sensitive information regarding our customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and our processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them.

If information security is breached, despite the controls we and our third-party vendors have instituted, information can be lost or misappropriated, resulting in financial losses or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance coverage we have, if any, which would adversely affect our earnings. If significant, sustained or repeated, a system breach, failure or service disruption could compromise our ability to operate effectively, damage our reputation and our relationships with our partners and customers, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.  

While we diligently assess applicable regulatory and legislative developments affecting our business, laws and regulations relating to cybersecurity have been frequently changing, imposing new requirements on us, such as the recently adopted New York State Department of Financial Services’ Cybersecurity Requirements for Financial Services Companies regulation. In light of these conditions, we face the potential for additional regulatory scrutiny that will lead to increasing compliance and technology expenses and, in some cases, possible limitations on the achievement of our plans for growth and other strategic objectives.

We are subject to competition from both banks and non-bank companies.
The financial services industry, including commercial banking, is highly competitive, and we encounter strong competition for deposits, loans and other financial services in our market area. Our principal competitors include commercial banks, savings banks and savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions, mortgage companies, real estate investment trusts (“REITs”), private issuers of debt obligations, venture capital firms, private equity funds and suppliers of other investment alternatives, such as securities firms. Many of our non-bank competitors are not subject to the same degree of regulation as we are and thus have advantages over us in providing certain services. Further, many of our competitors are significantly larger than we are and have greater access to capital and other resources.

In addition, financial products and services have become increasingly technology-driven. The adoption of new technologies, including Internet banking services, mobile applications, advanced ATM functionality and cryptocurrencies could require us to make substantial expenditures to modify or adapt our current products and services or to build new products and services. Our ability to meet the needs

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of our customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so could have a material adverse effect on our business and therefore on our financial condition and results of operations.

Our ability to make opportunistic acquisitions is subject to significant risks, including the risk that regulators will not provide the requisite approvals.
We will continue to evaluate potential acquisitions and may make opportunistic whole or partial acquisitions of other banks, branches, financial institutions, or related businesses from time to time that we expect may further our business strategy, including through participation in FDIC-assisted acquisitions or assumption of deposits from troubled institutions. Any possible acquisition will be subject to regulatory approval, and there can be no assurance that we will be able to obtain such approval in a timely manner or at all. Even if we obtain regulatory approval, these acquisitions could involve numerous risks, including lower than expected performance or higher than expected costs, difficulties related to integration, difficulties and costs associated with consolidation and streamlining inefficiencies, diversion of management’s attention from other business activities, changes in relationships with customers, and the potential loss of key employees. In addition, we may not be successful in identifying acquisition candidates or preventing deposit erosion or loan quality deterioration at acquired institutions. Competition for acquisitions can be highly competitive, and we may not be able to acquire other institutions on attractive terms. There can be no assurance that we will be successful in completing or will even pursue future acquisitions, or if such transactions are completed, that we will be successful in integrating acquired businesses into our existing operations. Our ability to grow may be limited if we choose not to pursue or are unable to successfully make acquisitions in the future.

The success of our and the Bank’s mergers and acquisitions may depend, in part, on our ability to realize the estimated cost savings from combining the acquired businesses with our and the Bank’s existing operations. It is possible that the potential cost savings could turn out to be more difficult to achieve than anticipated. The cost savings estimates also depend on our ability to combine the businesses in a manner that permits those cost savings to be realized. If the estimates turn out to be incorrect or if we are unable to successfully execute our strategy for combining businesses, our anticipated cost savings may not be realized fully or at all, or may take longer to realize than expected.

Moreover, although we have successfully integrated business acquisitions in recent years, there is no assurance that we will be able to continue to do so in the future, which could delay or prevent the anticipated benefits of future acquisitions from being realized fully or at all. In addition, acquisitions typically involve the payment of a premium over book and trading value and thus may result in the dilution of our book value per share.

Various factors may make takeover attempts more difficult to achieve.
The Board of Directors (the “Board”) currently has no intention to sell control of the Company. Provisions of our certificate of incorporation and bylaws, federal regulations, Delaware law and various other factors may make it more difficult for companies or persons to acquire control of us without the consent of our Board. A shareholder may want a takeover attempt to succeed because, for example, a potential acquirer could offer a premium over the then prevailing market price of our common stock. The factors that may discourage takeover attempts or make them more difficult include:

(a) Certificate of incorporation, bylaws and statutory provisions.
Provisions of our certificate of incorporation and bylaws and Delaware law may make it more difficult and expensive to pursue a takeover attempt that our Board opposes by making it more difficult to remove our current Board, or to elect new directors. These provisions include limitations on voting rights of beneficial owners of more than 10% of our common stock, supermajority voting requirements for certain business combinations, and plurality voting. Our bylaws also contain provisions regarding the timing and content of stockholder proposals and nominations and qualification for service on the Board.

(b) Required change in control payments and issuance of stock options and recognition and retention plan shares.
We have entered into employment agreements with executive officers, which require payments to be made to them in the event their employment is terminated following a change in control of us or the Bank. We have issued stock grants and stock options in accordance with the 2004 Provident Bancorp Inc. Stock Incentive Plan, the Sterling Bancorp 2014 Stock Incentive Plan and the Sterling Bancorp 2015 Omnibus Equity and Incentive Plan. In the event of a change in control, the vesting of stock and option grants would accelerate. In 2006, we adopted the Provident Bank & Affiliates Transition Benefit Plan. The

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plan calls for severance payments ranging from 12 weeks to one year for employees not covered by separate agreements if they are terminated in connection with a change in control of us.

Our results of operations, financial condition or liquidity may be adversely impacted by issues arising from certain industry deficiencies in foreclosure practices, including delays and challenges in the foreclosure process.
Foreclosure timelines in our principal marketplace are longer than the national average. Residential mortgages, in particular, may present us with foreclosure process issues. For example, residential mortgages were 20.4% of our total portfolio loans and loans held for sale as of December 31, 2018, but constituted 38.0% of our non-accrual loans on the same date. Collateral for many of our residential loans is located within the States of New York and New Jersey, where there may continue to be foreclosure process and timeline issues.

We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services.
We believe that our continued growth and future success will depend in large part on the skills of our management team and our ability to motivate and retain these individuals and other key personnel. In particular, we rely on the leadership of our Chief Executive Officer, Jack Kopnisky. The loss of service of Mr. Kopnisky or one or more of our other executive officers or key personnel could reduce our ability to successfully implement our long-term business strategy, our business could suffer, and the value of our common stock could be materially adversely affected. Leadership changes will occur from time to time, and we cannot predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel. We believe our management team possesses valuable knowledge about the banking industry and our markets and that their knowledge and relationships would be very difficult to replicate. Although the Chief Executive Officer, Chief Financial Officer and other executive officers have entered into employment agreements with us, it is possible that they may not complete the term of their employment agreements or renew them upon expiration. Our success also depends on the experience of our financial center managers and lending officers and on their relationships with the customers and communities they serve. The loss of these key personnel could negatively impact our banking operations. Further, the loss of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.

ITEM 1B.
Unresolved Staff Comments

Not Applicable.
ITEM 2. Properties

Our headquarters are located in a leased facility located at 400 Rella Boulevard, Montebello, New York. We also own a corporate office location in Yonkers, New York and lease corporate back-office space in Lake Success and Jericho on Long Island, New York. At December 31, 2018, we conducted our business through 106 full-service retail and commercial financial centers which serve the New York Metro Market and the New York Suburban Market. Of these financial centers, 24 are located in Nassau County, New York, 22 in Suffolk County, New York, 14 in Queens County, New York, 12 in Westchester County, New York, 11 in Kings County, New York, eight in in Rockland County, New York, six in Orange County, New York, three in New York City, New York and two in Bronx County, New York. We also operate one office in each of Sullivan, Ulster, and Putnam Counties in New York and one office in Bergen County, New Jersey. Additionally, 57 of our financial centers are owned and 49 are leased.

In addition to our financial center network and corporate offices, we lease 19 additional properties which are used for general corporate purposes. See Note 6. “Premises and Equipment, Net” in the notes to consolidated financial statements for further detail on our premises and equipment.

ITEM 3. Legal Proceedings
Note 19. “Commitments and Contingencies - Litigation” in the notes to consolidated financial statements is incorporated herein by reference. We do not anticipate that the aggregate liability arising out of litigation pending against us and our subsidiaries will be material to our consolidated financial statements.
ITEM 4.
Mine Safety Disclosures
Not Applicable.

PART II

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ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Market Prices, Holders and Dividends
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “STL”.

As of December 31, 2018, there were 216,227,852 shares of our common stock outstanding held by 6,886 holders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms). The closing price per share of common stock on December 31, 2018, the last trading day of our fiscal year, was $16.51.
The Board is committed to continuing to pay regular cash dividends; however, there can be no assurance as to future dividends because they are dependent upon our future earnings, capital requirements and financial condition.
See the section captioned “Supervision and Regulation” included in Item 1. “Business”, the section captioned “Liquidity and Capital Resources” included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 17. “Stockholders’ Equity” in the notes to consolidated financial statements, all of which are included elsewhere in this report, for additional information regarding our common stock and our ability to pay dividends.

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Performance Graph
Set forth below is a stock performance graph comparing the cumulative total shareholder return on Sterling Bancorp common stock with (a) the cumulative total return on the KBW Bank Index; and (b) the SNL Mid-Atlantic Bank Index, measured as of the last trading day of each period shown. The graph assumes an investment of $100 on September 30, 20131 and reinvestment of dividends on the date of payment without commissions. The performance graph represents past performance and should not be considered to be an indication of future stock performance.

1 The graph starts at September 30, 2013 to coincide with the fiscal year that began October 1, 2013 and ended September 30, 2014. We changed our fiscal year end to December 31 at December 31, 2014.
396946044_chart-cb640c8ca03d56028db.jpg
Performance at
 
September 30,
 
December 31,
Index
 
2013
 
2014
 
2014
 
2015
 
2016
 
2017
 
2018
Sterling Bancorp
 
100.00

 
117.45

 
132.05

 
148.94

 
214.88

 
225.90

 
151.61

KBW Bank Index
 
100.00

 
114.96

 
119.29

 
117.40

 
147.45

 
171.42

 
137.81

SNL Mid-Atlantic Bank Index
 
100.00

 
112.66

 
118.17

 
120.42

 
149.76

 
180.11

 
151.04

This stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this annual report on Form 10-K under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such Acts.

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Issuer Purchases of Equity Securities
The following table reports information regarding purchases of our common stock during the fourth quarter of 2018 and the stock repurchase plan approved by the Board:  

 
Total Number
of shares
(or units)
purchased 
 
Average
price paid
per share
(or unit)
 
Total number of
shares (or units)
purchased as part
of publicly
announced plans
or programs (1)
 
Maximum number
(or approximate
dollar value) of
shares (or units)
that may yet be
purchased under the
plans or programs (1)
Period (2018)
 
 
 
 
 
 
 
October 1 — October 31
1,020,055

 
$
17.66

 
1,020,055

 
8,979,945

November 1 — November 30
2,591,059

 
18.43

 
2,591,059

 
6,388,886

December 1 — December 31
5,503,657

 
17.10

 
5,503,657

 
10,885,229

Total
9,114,771

 
17.54

 
9,114,771

 
 

(1) On February 27, 2018, the Board of Directors authorized a repurchase plan for the purchase of up to 10,000,000 common shares, or 4.6% of the outstanding common shares excluding shares of treasury stock at December 31, 2017. On December 10, 2018, the Board of Directors increased the authorized share limit to 20,000,000 common shares, or 8.9% of the outstanding common shares of treasury stock at December 31, 2018. Repurchases may be made at management’s discretion through open market purchases and block trades in accordance with SEC and regulatory requirements. Any shares repurchased will be held as Treasury stock and made available for general corporate purposes.

ITEM 6.
Selected Financial Data

The following summary data is based in part on the consolidated financial statements and accompanying notes, and other schedules appearing elsewhere in this annual report on Form 10-K. The information at/for: (i) the calendar year ended December 31, 2018, 2017, 2016, and 2015; (ii) the three months ended December 31, 2014; and (iii) the fiscal year ended September 30, 2014 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto that appear in this annual report on Form 10-K.
For additional information regarding the significant changes in the financial data presented below, see the discussion of our recent mergers and acquisitions in Item 1. “Business”, in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Note 2. “Acquisitions” in the notes to consolidated financial statements, all of which are included elsewhere in this report.
Dollar amounts in tables are stated in thousands, except for share and per share amounts.

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At or for the year ended December 31,
 
At or for the three months ended December 31, 2014
 
At or for the fiscal year ended September 30, 2014
 
2018
 
2017
 
2016
 
2015
 
 
Selected balance sheet data:
 
 
 
 
 
 
 
 
 
 
 
End of period balances:
 
 
 
 
 
 
 
 
 
 
 
Total securities
$
6,667,180

 
$
6,474,561

 
$
3,118,838

 
$
2,643,823

 
$
1,713,183

 
$
1,689,888

Portfolio loans
19,218,530

 
20,008,983

 
9,527,230

 
7,859,360

 
4,815,641

 
4,760,438

Total assets
31,383,307

 
30,359,541

 
14,178,447

 
11,955,952

 
7,424,822

 
7,337,387

Non-interest bearing deposits
4,241,923

 
4,080,742

 
3,239,332

 
2,936,980

 
1,481,870

 
1,799,685

Interest bearing deposits
16,972,225

 
16,457,462

 
6,828,927

 
5,643,027

 
3,730,455

 
3,498,969

Total deposits
21,214,148

 
20,538,204

 
10,068,259

 
8,580,007

 
5,212,325

 
5,298,654

Borrowings
5,214,183

 
4,991,210

 
2,056,612

 
1,525,344

 
1,111,553

 
939,069

Stockholders’ equity
4,428,853

 
4,240,178

 
1,855,183

 
1,665,073

 
975,200

 
961,138

Tangible equity1
2,547,852

 
2,367,876

 
1,092,230

 
917,007

 
542,942

 
526,934

Average balances:
 
 
 
 
 
 
 
 
 
 
 
Total securities
$
6,704,025

 
$
4,144,435

 
$
2,878,944

 
$
2,156,056

 
$
1,721,121

 
$
1,692,888

Total loans
20,190,630

 
12,215,759

 
8,520,367

 
6,261,470

 
4,756,015

 
4,120,749

Total assets
30,746,916

 
18,451,301

 
12,883,226

 
9,604,256

 
7,340,332

 
6,757,094

Non-interest bearing deposits
4,108,881

 
3,363,636

 
3,120,973

 
2,332,814

 
1,626,341

 
1,580,108

Interest bearing deposits
16,874,456

 
9,570,199

 
6,519,993

 
4,806,521

 
3,716,446

 
3,341,822

Total deposits
20,983,337

 
12,933,835

 
9,640,966

 
7,139,335

 
5,342,787

 
4,921,930

Borrowings
4,950,546

 
2,759,919

 
1,355,491

 
987,522

 
902,299

 
814,409

Stockholders’ equity
4,344,096

 
2,498,512

 
1,739,073

 
1,360,859

 
973,089

 
906,134

Tangible equity1
2,458,580

 
1,464,057

 
976,394

 
760,254

 
539,693

 
450,551

Selected operating data:
 
 
 
 
 
 
 
 
 
 
 
Total interest income
$
1,208,473

 
$
682,449

 
$
461,551

 
$
348,141

 
$
68,087

 
$
246,906

Total interest expense
241,070

 
106,306

 
57,282

 
36,925

 
7,850

 
28,918

Net interest income
967,403

 
576,143

 
404,269

 
311,216

 
60,237

 
217,988

Provision for loan losses
46,000

 
26,000

 
20,000

 
15,700

 
3,000

 
19,100

Net interest income after provision for loan losses
921,403

 
550,143

 
384,269

 
295,516

 
57,237

 
198,888

Total non-interest income
103,197

 
64,202

 
70,987

 
62,751

 
13,957

 
47,370

Total non-interest expense
458,370

 
433,375

 
247,902

 
260,318

 
45,814

 
208,428

Income before income taxes
566,230

 
180,970

 
207,354

 
97,949

 
25,380

 
37,830

Income tax expense
118,976

 
87,939

 
67,382

 
31,835

 
8,376

 
10,152

Net income
447,254

 
93,031

 
139,972

 
66,114

 
17,004

 
27,678

Preferred stock dividends
7,978

 
2,002

 

 

 

 

Net income available to common stockholders
$
439,276

 
$
91,029

 
$
139,972

 
$
66,114

 
$
17,004

 
$
27,678

Per common share data:
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
1.96

 
$
0.58

 
$
1.07

 
$
0.60

 
$
0.20

 
$
0.34

Diluted earnings per share
1.95

 
0.58

 
1.07

 
0.60

 
0.20

 
0.34

Adjusted diluted earnings per share, non-GAAP1
2.00

 
1.40

 
1.11

 
0.96

 
0.23

 
0.72

Dividends declared per share
0.28

 
0.28

 
0.28

 
0.28

 
0.07

 
0.21

Dividend Payout Ratio
14.30
%
 
48.28
%
 
26.17
%
 
46.67
%
 
35.00
%
 
61.76
%
Book value per share
$
19.84

 
$
18.24

 
$
13.72

 
$
12.81

 
$
11.62

 
$
11.49

Tangible book value per share1
11.78

 
10.53

 
8.08

 
7.05

 
6.47

 
6.30

_________________________
See legend below tables.

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At or for the year ended December 31,
 
At or for the three months ended December 31, 2014
 
At or for the fiscal year ended September 30, 2014
 
2018
 
2017
 
2016
 
2015
 
 
Common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
Shares outstanding at period end
216,227,852

 
224,782,694

 
135,257,570

 
130,006,926

 
83,927,572

 
83,628,267

Weighted average shares basic
224,299,488

 
157,513,639

 
130,607,994

 
109,907,645

 
83,831,380

 
80,268,970

Weighted average shares diluted
224,816,996

 
158,124,270

 
131,234,462

 
110,329,353

 
84,194,916

 
80,534,043

Other data:
 
 
 
 
 
 
 
 
 
 
 
FTE period end
1,907

 
2,076

 
970

 
1,089

 
829

 
836

Financial centers period end
106

 
128

 
42

 
52

 
32

 
32

Performance ratios:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets
1.43
%
 
0.49
%
 
1.09
%
 
0.69
%
 
0.92
%
 
0.41
%
Return on average equity
10.11

 
3.64

 
8.05

 
4.86

 
6.93

 
3.05

Reported return on average tangible assets1
1.51

 
0.52

 
1.15

 
0.73

 
0.98

 
0.44

Adjusted return on average tangible assets1
1.55

 
1.27

 
1.20

 
1.17

 
1.13

 
0.92

Reported return on average tangible common equity1
17.87

 
6.22

 
14.34

 
8.70

 
12.50

 
6.14

Adjusted return on average tangible common equity1
18.29

 
15.17

 
14.90

 
13.86

 
14.42

 
12.84

Operating efficiency ratio, as reported1
42.8

 
67.7

 
52.2

 
69.6

 
61.7

 
78.5

Operating efficiency ratio, as adjusted1
38.8

 
41.8

 
46.2

 
50.8

 
54.0

 
58.7

Net interest margin - GAAP2
3.51

 
3.44

 
3.44

 
3.60

 
3.61

 
3.65

Net interest margin - tax equivalent basis2
3.57

 
3.55

 
3.55

 
3.67

 
3.70

 
3.74

Capital ratios (Company):3
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 risk-based ratio
12.31
%
 
12.37
%
 
10.73
%
 
10.74
%
 
NA

 
NA

Tier 1 risk-based capital ratio
12.95

 
13.07

 
10.73

 
10.74

 
10.43

 
10.33

Total risk-based capital ratio
14.06

 
14.18

 
12.73

 
11.29

 
11.22

 
11.10

Tier 1 leverage ratio
9.50

 
9.39

 
8.95

 
9.03

 
8.21

 
8.12

Tangible equity to tangible assets
9.06

 
8.76

 
8.14

 
8.18

 
7.76

 
7.63

Tangible common equity to tangible assets
8.60

 
8.27

 
8.14

 
8.18

 
7.76

 
7.63

Regulatory capital ratios (Bank):
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 risk-based ratio
13.55
%
 
13.95
%
 
10.87
%
 
11.45
%
 
NA

 
NA

Tier 1 risk-based capital ratio
13.55

 
13.95

 
10.87

 
11.45

 
12.00

 
11.94

Total risk-based capital ratio
14.80

 
15.21

 
13.06

 
12.00

 
12.79

 
12.71

Tier 1 leverage ratio
9.94

 
10.10

 
9.08

 
9.65

 
9.39

 
9.34

Asset quality data and ratios:
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
$
95,677

 
$
77,907

 
$
63,622

 
$
50,145

 
$
42,374

 
$
40,612

Non-performing loans (“NPLs”)
168,822

 
187,213

 
78,853

 
66,411

 
46,642

 
50,963

Non-performing assets (“NPAs”)
188,199

 
214,308

 
92,472

 
81,025

 
52,509

 
58,543

Net charge-offs
28,230

 
11,715

 
6,523

 
7,929

 
1,238

 
7,365

NPAs to total assets
0.60
%
 
0.71
%
 
0.65
%
 
0.68
%
 
0.71
%
 
0.80
%
NPLs to total loans3
0.88

 
0.94

 
0.83

 
0.84

 
0.97

 
1.07

Allowance for loan losses to non-performing loans
56.67

 
41.61

 
80.68

 
75.50

 
90.80

 
79.69

Allowance for loan losses to total loans3
0.50

 
0.39

 
0.67

 
0.64

 
0.88

 
0.85

Net charge-offs to average loans
0.14

 
0.10

 
0.08

 
0.13

 
0.10

 
0.24

________________________
1 
See a reconciliation of as reported financial measures to as adjusted (non-GAAP) financial measures below under the caption “Non-GAAP Financial Measures.”
2 
Net interest margin is net interest income directly from our consolidated income statements as a percentage of average interest-earning assets for the period. Net interest margin tax equivalent basis is net interest income adjusted for the portion of our net interest income that will be exempt from taxation (e.g., was received as a result of holdings of state or municipal obligations). An

22

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amount equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered helpful in comparing one financial institution’s net interest income (pre-tax) to that of another institution, as each will have a different proportion of tax-exempt items in their portfolios.
3 
Total loans excludes loans held for sale.

Non-GAAP Financial Measures
The non-GAAP financial measures presented below are used by management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance and to assess our performance compared to our annual budget and strategic plans. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide investors, analysts, regulators and others information that we use to manage our business. Because not all companies use identical calculations, the presentation of the non-GAAP financial measures may not be comparable to other similarly titled measures used by other companies. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results. Accordingly, this non-GAAP financial information should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2018, included elsewhere in this annual report on Form 10-K. The following non-GAAP financial measures reconcile our GAAP reported results to our as adjusted non-GAAP reported results and metrics presented in the Selected Financial Data table above in this Item. 6.

 
At or for the year ended December 31,
 
At or for the three months ended December 31, 2014
 
At or for the fiscal year ended September 30, 2014
 
2018
 
2017
 
2016
 
2015
 
 
The following table shows the reconciliation of stockholders’ equity to tangible common equity (non-GAAP) and the tangible common equity ratio (non-GAAP)1:
Total assets
$
31,383,307

 
$
30,359,541

 
$
14,178,447

 
$
11,955,952

 
$
7,424,822

 
$
7,337,387

Goodwill and other intangibles
(1,742,578
)
 
(1,733,082
)
 
(762,953
)
 
(748,066
)
 
(432,258
)
 
(434,204
)
Tangible assets
29,640,729

 
28,626,459

 
13,415,494

 
11,207,886

 
6,992,564

 
6,903,183

Stockholders’ equity
4,428,853

 
4,240,178

 
1,855,183

 
1,665,073

 
975,200

 
961,138

Preferred stock
(138,423
)
 
(139,220
)
 

 

 

 

Goodwill and other intangibles
(1,742,578
)
 
(1,733,082
)
 
(762,953
)
 
(748,066
)
 
(432,258
)
 
(434,204
)
Tangible common stockholders’ equity
2,547,852

 
2,367,876

 
1,092,230

 
917,007

 
542,942

 
526,934

Common stock outstanding at period end
216,227,852

 
224,782,694

 
135,257,570

 
130,006,926

 
83,927,572

 
83,628,267

Common stockholders’ equity as a % of total assets
13.67
%
 
13.51
%
 
13.08
%
 
13.93
%
 
13.13
%
 
13.10
%
Book value per common share
$
19.84

 
$
18.24

 
$
13.72

 
$
12.81

 
$
11.62

 
$
11.49

Tangible common equity as a % of tangible assets
8.60
%
 
8.27
%
 
8.14
%
 
8.18
%
 
7.76
%
 
7.63
%
Tangible book value per common share
$
11.78

 
$
10.53

 
$
8.08

 
$
7.05

 
$
6.47

 
$
6.30


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At or for the year ended December 31,
 
At or for the three months ended December 31, 2014
 
At or for the fiscal year ended September 30, 2014
 
2018
 
2017
 
2016
 
2015
 
 
The following table shows the reconciliation of reported net income (GAAP) and earnings per share to adjusted net income available to common stockholders (non-GAAP) and adjusted diluted earnings per share (non-GAAP) 2:
Income before income tax expense
$
566,230

 
$
180,970

 
$
207,354

 
$
97,949

 
$
25,380

 
$
37,830

Income tax expense
118,976

 
87,939

 
67,382

 
31,835

 
8,376

 
10,152

Net income (GAAP)
447,254

 
93,031

 
139,972

 
66,114

 
17,004

 
27,678

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Net loss (gain) on sale of securities
10,788

 
344

 
(7,522
)
 
(4,837
)
 
43

 
(641
)
Net (gain) loss on sale of fixed assets
(11,800
)
 
1

 

 

 

 
(916
)
(Gain) on sale of trust division

 

 
(2,255
)
 

 

 

(Gain) loss on extinguishment of debt
(172
)
 

 
9,729

 

 

 
(721
)
Merger-related expense

 
39,232

 
265

 
17,079

 
502

 
9,455

Charge for asset write-downs, systems integration, retention and severance
13,132

 
105,110

 
4,485

 
29,046

 
2,493

 
26,591

Charge on benefit plan settlement

 

 

 
13,384

 

 
4,095

Amortization of non-compete agreements and acquired customer list intangibles
1,177

 
1,411

 
3,514

 
3,526

 
859

 
5,489

Total pre-tax adjustments
13,125

 
146,098

 
8,216

 
58,198

 
3,897

 
43,352

Adjusted pre-tax income
579,355

 
327,068

 
215,570

 
156,147

 
29,277

 
81,182

Adjusted income tax expense
121,732

 
103,027

 
70,052

 
50,749

 
9,662

 
23,340

Adjusted net income (non-GAAP)
457,623

 
224,041

 
145,518

 
105,398

 
19,615

 
57,842

Preferred stock dividend
7,978

 
2,002

 

 

 

 

Adjusted net income available to common stockholders (non-GAAP)
$
449,645

 
$
222,039

 
$
145,518

 
$
105,398

 
$
19,615

 
$
57,842

Weighted average diluted shares
224,816,996

 
158,124,270

 
131,234,462

 
110,329,353

 
84,194,916

 
80,534,043

Diluted EPS (GAAP)
$
1.95

 
$
0.58

 
$
1.07

 
$
0.60

 
$
0.20

 
$
0.34

Adjusted diluted EPS (non-GAAP)
2.00

 
1.40

 
1.11

 
0.96

 
0.23

 
0.72

 
At or for the year ended December 31,
 
At or for the three months ended December 31, 2014
 
At or for the fiscal year ended September 30, 2014
 
2018
 
2017
 
2016
 
2015
 
 
The following table shows the reconciliation of reported return on average tangible common equity and adjusted return on average tangible common equity (non-GAAP) 3:
Average stockholders’ equity
$
4,344,096

 
$
2,498,512

 
$
1,739,073

 
$
1,360,859

 
$
973,089

 
$
906,134

Average preferred stock
(138,829
)
 
(35,122
)
 

 

 

 

Average goodwill and other intangibles
(1,746,687
)
 
(999,333
)
 
(762,679
)
 
(600,605
)
 
(433,396
)
 
(455,583
)
Average tangible common stockholders’ equity
2,458,580

 
1,464,057

 
976,394

 
760,254

 
539,693

 
450,551

Net income available to common stockholders
439,276

 
91,029

 
139,972

 
66,114

 
17,004

 
27,678

Net income available to common stockholders, if annualized
439,276

 
91,029

 
139,972

 
66,114

 
67,462

 
27,678

Reported return on average tangible common equity
17.87
%
 
6.22
%
 
14.34
%
 
8.70
%
 
12.50
%
 
6.14
%
Adjusted net income available to common stockholders
$
449,645

 
$
222,039

 
$
145,518

 
$
105,398

 
$
19,615

 
$
57,842

Annualized adjusted net income available to common stockholders
449,645

 
222,039

 
145,518

 
105,398

 
77,820

 
57,842

Adjusted return on average tangible common equity
18.29
%
 
15.17
%
 
14.90
%
 
13.86
%
 
14.42
%
 
12.84
%

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At or for the year ended December 31,
 
At or for the three months ended December 31, 2014
 
At or for the fiscal year ended September 30, 2014
 
2018
 
2017
 
2016
 
2015
 
 
The following table shows the reconciliation of the reported operating efficiency ratio and adjusted operating efficiency ratio (non-GAAP) 4:
Net interest income
$
967,403

 
$
576,143

 
$
404,269

 
$
311,216

 
$
60,237

 
$
217,988

Non-interest income
103,197

 
64,202

 
70,987

 
62,751

 
13,957

 
47,370

Total net revenue
1,070,600

 
640,345

 
475,256

 
373,967

 
74,194

 
265,358

Tax equivalent adjustment on securities
16,231

 
20,054

 
12,745

 
6,503

 
1,546

 
5,628

Net loss (gain) on sale of securities
10,788

 
344

 
(7,522
)
 
(4,837
)
 
43

 
(641
)
Net (gain) loss on sale of fixed assets
(11,800
)
 
1

 

 

 

 
(916
)
(Gain) on sale of trust division

 

 
(2,255
)
 

 

 

Other (other gains and fair value loss on interest rate caps)

 

 

 

 

 
(93
)
Adjusted total net revenue
1,085,819

 
660,744

 
478,224

 
375,633

 
75,783

 
269,336

Non-interest expense
458,370

 
433,375

 
247,902

 
260,318

 
45,814

 
208,428

Merger-related expense

 
(39,232
)
 
(265
)
 
(17,079
)
 
(502
)
 
(9,455
)
Charge for asset write-downs, systems integration, retention and severance
(13,132
)
 
(105,110
)
 
(4,485
)
 
(29,046
)
 
(2,493
)
 
(26,591
)
Gain (loss) on extinguishment of debt
172

 

 
(9,729
)
 

 

 
(721
)
Charge on benefit plan settlement

 

 

 
(13,384
)
 

 
(4,095
)
Amortization of intangible assets
(23,646
)
 
(13,008
)
 
(12,416
)
 
(10,043
)
 
(1,873
)
 
(9,408
)
Adjusted non-interest expense
$
421,764

 
$
276,025

 
$
221,007

 
$
190,766

 
$
40,946

 
$
158,158

Reported operating efficiency ratio
42.8
%
 
67.7
%
 
52.2
%
 
69.6
%
 
61.7
%
 
78.5
%
Adjusted operating efficiency ratio
38.8
%
 
41.8
%
 
46.2
%
 
50.8
%
 
54.0
%
 
58.7
%
__________________________
See legend below tables.
 
At or for the year ended December 31,
 
At or for the three months ended December 31, 2014
 
At or for the fiscal year ended September 30, 2014
 
2018
 
2017
 
2016
 
2015
 
 
The following table shows the reconciliation of reported return on average tangible assets and adjusted return on average tangible assets 5:
Average assets
$
30,746,916

 
$
18,451,301

 
$
12,883,226

 
$
9,604,256

 
$
7,340,332

 
$
6,757,094

Average goodwill and other intangibles
(1,746,687
)
 
(999,333
)
 
(762,679
)
 
(600,605
)
 
(433,396
)
 
(455,583
)
Average tangible assets
29,000,229

 
17,451,968

 
12,120,547

 
9,003,651

 
6,906,936

 
6,301,511

Net income available to common stockholders
439,276

 
91,029

 
139,972

 
66,114

 
17,004

 
27,678

Net income (loss) available to common stockholders, if annualized
439,276

 
91,029

 
139,972

 
66,114

 
67,462

 
27,678

Reported return on average tangible assets
1.51
%
 
0.52
%
 
1.15
%
 
0.73
%
 
0.98
%
 
0.44
%
Adjusted net income available to common stockholders
$
449,645

 
$
222,039

 
$
145,518

 
$
105,398

 
$
19,615

 
$
57,842

Annualized adjusted net income available to common stockholders
449,645

 
222,039

 
145,518

 
105,398

 
77,820

 
57,842

Adjusted return on average tangible assets
1.55
%
 
1.27
%
 
1.20
%
 
1.17
%
 
1.13
%
 
0.92
%

1 
Stockholders’ equity as a percentage of total assets, book value per common share, tangible common equity as a percentage of tangible assets and tangible book value per common share provides information to help assess our capital position and financial strength. We believe tangible book value measures allow comparability to other banking organizations that have not engaged in acquisitions that have resulted in the accumulation of goodwill and other intangible assets.


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Adjusted net income and adjusted diluted earnings per share present a summary of our earnings, which includes adjustments to exclude certain revenues and expenses (generally associated with discrete merger transactions and non-recurring strategic plans) to help in assessing our recurring profitability.

3 
Reported return on tangible common equity and the adjusted return on average tangible common equity measures provide information to evaluate our use of tangible equity.

4 
The reported operating efficiency ratio is a non-GAAP measure calculated by dividing our GAAP non-interest expense by the sum of our GAAP net interest income plus GAAP non-interest income. The adjusted efficiency ratio is a non-GAAP measure calculated by dividing non-interest expense adjusted for intangible asset amortization and certain expenses generally associated with discrete merger transactions and non-recurring strategic plans by the sum of net interest income plus non-interest income plus the tax equivalent adjustment on securities income and elimination of the the impact of gain or loss on sale of securities. The adjusted efficiency ratio is a measure we use to assess our operating performance.

5 
Reported return on average tangible assets and the adjusted return on average tangible assets measures provide information to help assess our profitability.

ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
We make statements in this report, and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses and/or other financial, business or strategic matters regarding or affecting us that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “target,” “estimate,” “forecast,” “project,” by future conditional verbs such as “will,” “should,” “would,” “could” or “may,” or by variations of such words or by similar expressions. These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based on the beliefs and assumptions of the management and the information available to management at the time that these disclosures were prepared.

Forward-looking statements are subject to numerous assumptions, risks (both known and unknown) and uncertainties, and other factors which change over time. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements. Because forward-looking statements are subject to assumptions, risks, uncertainties, and other factors, actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements and future results could differ materially from our historical performance.

The following factors, among others, could cause our future results to differ materially from the plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in forward-looking statements:
our ability to successfully implement growth and other strategic initiatives, reduce expenses and to integrate and fully realize cost savings and other benefits we estimate in connection with acquisitions, and limiting any business disruption arising therefrom;
oversight of the Bank by the Consumer Financial Protection Bureau;
adverse publicity, regulatory actions or litigation with respect to us or other well-known companies and the financial services industry in general and a failure to satisfy regulatory standards;
the effects of and changes in monetary and policies of the Board of Governors of the Federal Reserve System and the U.S. Government, respectively;
our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves;
our use of estimates in determining the fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuation;
our ability to manage changes in market interest rates;
our ability to capitalize on our substantial investments in our information technology and operational infrastructure and systems;

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changes in other economic, competitive, governmental, regulatory, and technological factors affecting our markets, operations, pricing, products, services and fees; and
our success at managing the risks involved in the foregoing and managing our business.

Additional factors that may affect our results are discussed in this annual report on Form 10-K under Item 1A, “Risk Factors” and elsewhere in this report or in other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. You should read such statements carefully.

Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with GAAP and conform to general practices within the banking industry. Accounting policies considered critical to our financial results include the allowance for loan losses, accounting for business combinations, accounting for goodwill, trade names and other intangible assets, accounting for deferred income taxes and the recognition of interest income. For additional information on our significant accounting policies, see Note 1. “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” in the notes to consolidated financial statements.
Allowance for Loan Losses. The methodology for determining the allowance for loan losses is considered by us to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate our loans at least quarterly, including a review of their risk components and their carrying value, and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making such evaluations. In addition, as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
See Note 1. “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” in the notes to consolidated financial statements for a discussion of the risk components. We consistently review the risk components to identify any changes in trends.
Business Combinations. We account for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
Interest Income. Interest income on loans, securities and other interest-earning assets is accrued monthly unless we consider the collection of interest to be doubtful. Loans are placed on non-accrual status upon the earlier of (i) when payments are contractually past due 90 days or more; or (ii) when we have determined that the borrower is unlikely to meet contractual principal or interest obligations, unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income for interest in the current year or the allowance for loan losses with respect to prior year income. Interest payments received on non-accrual loans (including impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are returned to accrual status when collectability is no longer considered doubtful. Loans we acquired in mergers are initially recorded at fair value, which involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. We continue to evaluate reasonableness of expectations for the timing and amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired.

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General
The Astoria Merger, the merger with Hudson Valley Holding Corp. (the “HVB Merger”), and the other acquisitions discussed in Note 2. “Acquisitions” in the notes to consolidated financial statements were accounted for as business combinations, and accordingly, their related results of operations are included from the date of acquisition. The discussion and analysis should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other information contained in this report.

Recent Developments
Please refer to Item 1. Business for details on recent developments and significant transactions that have impacted our results in the periods presented. Also, see Note 23. “Quarterly Results of Operations (Unaudited)” in the notes to consolidated financial statements for additional information regarding our quarterly results for 2018 and 2017.

Results of Operations
We reported net income available to common stockholders of $439.3 million, or $1.95 per diluted common share for 2018, compared to net income available to common stockholders of $91.0 million, or $0.58 per diluted common share for 2017, and net income available to common stockholders of $140.0 million, or $1.07 per diluted common share, for 2016.

Results for 2018 included continued organic growth from our commercial banking teams, and, since April 2, 2018, the results from the Advantage Funding Acquisition. Results for 2018 were also impacted by the successful integration of Astoria’s operating activities, including the completion of the conversion of Astoria’s legacy deposit systems; progress on our real estate consolidation strategy, and the realization of anticipated efficiencies which have resulted in reduced staffing levels.

Results for 2017 included, from October 2, 2017, the combined results from the Astoria Merger. Results for 2016 reflected the continuing successful integration of the HVB Merger, as well as organic growth generated from our commercial banking teams.

The table below summarizes our results of operations on a tax equivalent basis. Tax equivalent adjustments are the result of increasing income from tax-free securities by an amount equal to the taxes that would be paid if the income were fully taxable based on the 35% federal tax rate that was in effect for 2016 and 2017 and the 21% federal tax rate that was in effect for 2018, thus making tax-exempt yields comparable to taxable asset yields.

Dollar amounts in tables and the accompanying discussion that follows are stated in thousands, except for per share amounts and ratios.


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Selected operating data, return on average assets, return on average common equity and dividends per common share for the comparable periods follow:
 
For the year ended December 31,
 
2018
 
2017
 
2016
Tax equivalent net interest income
$
983,634

 
$
596,197

 
$
417,014

Less tax equivalent adjustment
(16,231
)
 
(20,054
)
 
(12,745
)
Net interest income
967,403

 
576,143

 
404,269

Provision for loan losses
46,000

 
26,000

 
20,000

Non-interest income
103,197

 
64,202

 
70,987

Non-interest expense
458,370

 
433,375

 
247,902

Income before income tax expense
566,230

 
180,970

 
207,354

Income tax expense
118,976

 
87,939

 
67,382

Net income
447,254

 
93,031

 
139,972

Preferred stock dividend
7,978

 
2,002

 

Net income available to common stockholders
$
439,276

 
$
91,029

 
$
139,972

 
 
 
 
 
 
Earnings per common share - basic
$
1.96

 
$
0.58

 
$
1.07

Earnings per common share - diluted
1.95

 
0.58

 
1.07

Dividends per common share
0.28

 
0.28

 
0.28

Return on average assets
1.43
%
 
0.49
%
 
1.09
%
Return on average equity
10.11

 
3.64

 
8.05


Net Income
For 2018, net income available to common stockholders was $439,276 compared to net income available to common stockholders of $91,029 for 2017, an increase of $348,247. Results for 2018 included the following pre-tax charges:

amortization of non-compete agreements and acquired customer list intangible assets of $1,177;
net loss on sale of securities of $10,788;
gain on sale of fixed assets, resulting from the sale of Astoria’s former headquarters of $11,800;
charges for asset write-downs, systems integration, retention and severance associated with the Advantage Funding acquisition of $4,396 and loss on impairment of financial centers consolidated in 2018 of $8,736 for a total of $13,132; and
gain on extinguishment of senior notes of $172.

Excluding the impact of these items, adjusted net income available to common stockholders (non-GAAP) was $449,645, and adjusted diluted earnings per share available to common stockholders (non-GAAP) were $2.00 for 2018.

Net income available to common stockholders declined $48,943 to $91,029 for 2017, compared to $139,972 for 2016. Results for 2017 included the following pre-tax charges:

merger-related expense associated with the Astoria Merger of $39,232;
charges for asset write-downs, systems integration, retention and severance associated with the Astoria Merger of $105,110;
net loss on sale of securities of $344; and
amortization of non-compete agreements and acquired customer list intangible assets of $1,411.

In addition, in connection with the Tax Cuts and Jobs Act of 2017, in the fourth quarter of 2017 we recorded a charge of $40,285 in income tax expense to write-down our net deferred tax assets to their estimated value.

Excluding the impact of these items, adjusted net income available to common stockholders (non-GAAP) were $222,039, and adjusted diluted earnings available to common stockholders (non-GAAP) per share were $1.40 for 2017.


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Results for 2016 included the following pre-tax charges and gains:

merger-related expense associated with the NSBC Acquisition of $265;
amortization of non-compete agreements and acquired customer list intangible assets of $3,514;
charges for asset write-downs, systems integration, retention and severance incurred in connection with the divestiture of our residential mortgage originations business, charges incurred in connection with the NSBC Acquisition and continued consolidation of financial centers and other locations of $4,485;
net gain on sale of the trust division of $2,255;
net gain on sale of securities of $7,522; and
loss on extinguishment of a portion of our 5.50% fixed rate senior notes (the “Senior Notes”) and Federal Home Loan Bank of New York (“FHLB”) borrowings of $9,729.

Excluding the impact of these items, adjusted net income available to common stockholders (non-GAAP) were $145,518, and adjusted diluted earnings (non-GAAP) per share were $1.11 for 2016. Please refer to Item 6. “Selected Financial Data” for a reconciliation of the non-GAAP financial measures highlighted above.

Details of the changes in the various components of net income available to common stockholders are further discussed below.

Net Interest Income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source of revenue, representing 90.4% and 90.0% of total revenue in 2018 and 2017, respectively. Net interest margin is the ratio of taxable equivalent net interest income to average interest-earning assets for the period. The level of interest rates and the volume and mix of interest earning assets and interest bearing liabilities impact net interest income and net interest margin.

We are primarily funded by core deposits, and non-interest bearing demand deposits represent a significant portion of our funding. Our low cost funding base has had a positive impact on our net interest income and net interest margin. We expect this positive impact to continue in a rising interest rate environment provided longer-term interest rates moved ratably in-line with shorter-term interest rates. However, a flattening of the interest rate yield curve, where the spread between short-term rates and long-term rates narrows, makes holding longer-term and fixed rate interest earning assets less profitable as the cost to fund those assets with shorter-term deposits and borrowings increases, reducing our net interest margin and spread.

The following table sets forth our average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of purchase accounting adjustments, deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


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For the year ended December 31,
 
2018
 
2017
 
2016
 
Average
balance
 
Interest
 
Yield/Rate
 
Average
balance
 
Interest
 
Yield/Rate
 
Average
balance
 
Interest
 
Yield/Rate
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C&I and commercial finance loans (1)
$
5,774,201

 
$
303,167